The S&P 500 ETF that’s a little bit zut alors, sacrebleu!

Back in October, iShares, the world’s leading exchange traded fund provider, decided to set an important transparency example for the ETF industry.  The ETF provider began providing the market with details of its securities lending operations. Such operations are a key part of the of the business for iShares since most of its ETFs are done through “replication” where the cash instruments are held, rather than the exposures of the funds being created by derivatives, i.e. “synthetically”.

And some interesting themes have started to emerge with regards to the collateral it holds to support those loans.

Take, for example, the provider’s UK-listed S&P 500 ETF.

As of November 23, the fund — designed to track the performance of the S&P 500 index by investing directly in the constituents of the index — held something in the region of $8.5bn under management.

Yet, what investors may have failed to appreciate until the transparency initiative began, was that fund — which is also listed across a number of other European jurisdictions — has more than just an S&P 500 flavour to it.

According to its latest securities lending declaration, more than 30 per cent of the collateral the fund holds to cover its securities lending exposures has a distinctly French theme (click to enlarge):

As Blackrock notes:

The primary risk in securities lending is that a borrower will default on their commitment to return lent securities while the value of the liquidated collateral does not exceed the cost of repurchasing the securities and the fund suffers a loss in respect of the short-fall.

Of course, to cover that risk, Blackrock utilises an overcollateralisation policy. In the case of equities that ranges between 110-112 per cent.

Related links:
The US Treasury investment that’s a bit bunga bunga – FT Alphaville
When US Treasuries diverge from Italian bonds… [Updated] - FT Alphaville
Do banks see ETFs as inexpensive funding for illiquid securities? – Part I – FT Alphaville